eur fundamentals

Euro - European Central Bank Cuts Rates 50bps to 3.25% As Expected, Signals More to Come

Thursday, 06 November 2008 14:10:12 GMT  |  John Kicklighter and Terri Belkas, Currency Strategists

At 7:45 ET on Thursday, the European Central Bank (ECB) cut rates in line with expectations by 50 basis points to a nearly 2-year low of 3.25 percent. As usual, comments by ECB President Jean-Claude Trichet during his 8:30 ET provided greater insight on where the central bank stands.

Mr. Trichet said that the outlook for price stability has improved as inflation is anticipated to continue falling, though he could not rule out a sharp decline next year, suggesting that even they – previously one of the most hawkish central banks in the developed world - are concerned about the potential for deflation. Mr. Trichet also said that the rate decision was unanimous, a 75 basis point reduction was considered, and that he would not exclude cutting rates again. This seems increasingly possible, as the ECB noted that economic indicators had reflected slowing growth inthe Euro-zone while downside risks from financial market tensions had materialized and remain a threat to expansion going forward.

Until today, the European Central Bank was the only G10 policy authority that was holding strictly to its inflation convictions. This stubborn stance was a boon for the euro for some time, helping to prop the currency against its major counterparts for some time. However, with the Euro Zone falling into recession and European banks requiring bailouts, speculation had gotten the best of the buoyant currency and turned its good fortunes. Today’s 50bps cut changed the ECB’s policy stance more than their participation in the coordinated rate cut at the beginning of October; because it reflected a change in their expectations for the worst and suggested they would act on rates outside of the influence of a financial panic. With such fundamental capitulation, the euro would drop against all its major counterparts.

Check out our Central Bank Interest Rate Summary for more on the rate cuts implemented by other European central banks on Thursday and its impact on the forex markets.

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